Small Business Taxes Overview

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Small business owners pay two types of taxes: personal taxes on the income they earn through their business and small business taxes on the company's financial activities. Unlike personal taxes, which individuals file annually, business taxes operate on quarterly payment schedules.

Many factors impact small business tax requirements and rates, including:

• Your company's legal business structure
• Where your company is based
• Whether you qualify for credits and deductions

As a business owner, you may choose to work with a tax professional or file your small business taxes yourself. In the latter case, some fundamental accounting training can help. Explore our guide to learn more about small business taxes.

Which Business Structure Should I Use?

As a small business owner, you must select a legal structure for your company. You will need to identify that legal structure when you register your company in the state where it is based.

This critical decision can have major impacts on your small business taxes, influencing the rates you pay and the extent to which your personal assets become entangled with the business entity. Many other technicalities and complications can also arise from your decision, potentially affecting both taxation and operations.

Your main business structure options include:

• Sole proprietorship
• Partnership
• Limited liability company (LLC)
• C or S corporation

The Internal Revenue Service (IRS) also has a category for international small businesses with ties to the United States.

Every structure has unique features, advantages, and drawbacks, as detailed below:

Sole Proprietorship

Taxation experts generally consider sole proprietorships the simplest and most straightforward business structure. The Small Business Administration (SBA) recommends this category to risk-averse solo entrepreneurs, and to entrepreneurs who want to validate their business concept before launching it under a more complex structure.

Your business is automatically considered a sole proprietorship if you are the only owner and you do not register your company under any other structure. You can also register or identify as a sole proprietorship when applying for any permits or licenses your business may require.

As a sole proprietor, you have complete control over all business decisions. You can also file business taxes under your personal Social Security number (SSN) and use specialized forms to report profits or losses to federal tax authorities.

However, you also face some unique risks as the owner of a sole proprietorship. First, you become personally responsible for the business's debts and other financial obligations. This could impact your personal finances. Also, financial institutions tend to consider sole proprietorships riskier, which may make it harder to secure external funding.

Partnership

Partnerships are the second-simplest business structure behind sole proprietorships. If you co-own your business with one or more other people, it may make sense to register as a partnership. Cooperative professionals, such as the joint owners of law firms or public accounting firms, often choose this business structure.

The process for registering a partnership varies, depending on the state where the business is based. However, the process generally involves:

• Registering with federal authorities and obtaining a federal tax identification number
• Registering with the state government where the business is based or conducts most of its operations
• Securing a registered agent who assumes responsibility for collecting legal documents on the company's behalf
• Filing identifying documents and paying required registration fees

Partnerships can operate as limited partnerships (LPs) or limited liability partnerships (LLPs). The following table highlights the key differences between these structures:

Source: SBA

Limited Liability Company

Limited liability companies (LLCs) combine the advantages of partnerships and corporate structures. In most cases, the LLC's owners — known as "members" — are not personally responsible for business debts, lawsuits, bankruptcies, or other liabilities.

Many states allow single-member LLCs with just one owner and multi-owner LLCs with any number of members. However, regulations vary among states, and you should refer to the rules that apply in the jurisdiction where you plan to register your business.

LLCs protect members from personal liability while permitting them to avoid double taxation in some corporate structures. However, they face limitations in some states that may require the termination and re-formation of the business in the event of membership changes, creating extra costs and administration.

For tax purposes, LLC members are considered self-employed and must pay the required contributions to programs like Social Security and Medicaid.

The SBA recommends the LLC structure to business owners who hold extensive personal assets and want them protected. LLCs are also good for eligible businesses that want to minimize their tax burdens. However, some businesses, such as insurance providers and banks, cannot use the LLC structure.

Corporation

Corporations are fully separated from their owners, who are known as shareholders. When creating a corporation, shareholders essentially agree to acquire capital stock that represents an ownership stake in the corporation.

In general, corporations work best for business owners who want to put the maximum legal distance between themselves and the company. Corporations offer shareholders the strongest protections from personal financial liability, but they are subject to strict accounting and reporting requirements. Corporations also face higher setup costs than sole proprietorships, partnerships, and LLCs.

As legal entities, corporations can be taxed and held responsible for financial liabilities. This can create a double taxation situation for their owners, who must first pay taxes on profits earned by the corporation and again when those profits are distributed to them as personal income.

To avoid double taxation, you can set up your corporation as an S corporation (S corp). Most other corporations operate as a C corporation (C corp).

The following table highlights key differences between C and S corporations:

Source: SBA

International

International business structures define companies based in the United States that earn revenues outside the country, or vice versa. It is possible to overlap an international company with the business structures profiled above, but many legal complexities and technicalities apply. If you want to do this, consider hiring someone with the requisite legal expertise to assist you.

To register an international business, you must obtain a tax identification number (TIN) from the IRS and formally incorporate. If you are a resident of a country other than the United States for tax purposes, tax treaties may also apply to your business operations.

Which Types of Taxes Do I Need to File?

The taxes you or your business pays — and the jurisdictions in which you pay them — depend on what type of business structure you choose and whether you have any employees.

Explore further details about federal, state, and local taxes below:

When Do I Need to File Small Business Taxes?

You must first designate an accounting period. This period defines the annual start and end dates of your business' financial activity that will determine your tax payments.

You have two accounting period options:

• Calendar Year: This option spans the 12-month period beginning on Jan. 1 and ending on Dec. 31.
• Fiscal Year: This option covers 52-53 consecutive weeks ending on the final day of any calendar month other than December.

Quarterly Estimated Taxes

Individual taxpayers file their tax returns annually, typically by the traditional April 15 deadline. However, businesses follow a different system and submit quarterly tax payments because the IRS requires business owners to pay taxes as they receive income.

To comply with IRS standards for small business taxes, you must estimate your quarterly tax liabilities and submit payments based on those estimates. If you overestimate your tax liabilities, the IRS will reimburse you for the difference at the end of your tax year.

Use the following table to create a schedule for paying your estimated quarterly business taxes:

Can I Get Small Business Tax Deductions and Credits?

Tax deductions and tax credits are powerful tools for reducing your taxes. A tax deduction is an amount you can legally subtract from your taxable business income, shielding the deducted income from taxation. A tax credit is a sum you can subtract from a required tax payment.

Deductions can cover expenses related to:

• Home offices and mileage on personal vehicles when they are used for business purposes
• Interest paid on business-related debts
• Energy efficiency features on commercial structures

Tax credits are generally considered more valuable than deductions, but they are also more complex. The IRS publishes a complete list of available business tax credits, which you can consult and use to your full legal advantage.

What Kind of Accounting Help Is Available?

Small business taxes can be complex, and mistakes can be costly. Many business owners choose to hire accountants, either internally or as outsourced contractors, to help them.

However, you can also manage your tax obligations if you learn basic small business accounting rules and build a strong working knowledge of applicable federal, state, and local tax laws. Accounting courses, certificate programs, or an associate degree or bachelor's in accounting can help.

Tax software makes it easier to track your obligations and liabilities. Popular options include platforms like FreeTaxUSA, H&R Block, Intuit TurboTax, TaxAct, and TaxSlayer. However, tax software suites often involve ongoing subscription costs and you may find it more advantageous in the long run to hire a professional or invest in accounting education.

Common Questions on Small Business Taxes